FRS 120 ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF GOVERNMENT ASSISTANCE

1. FRS 120 ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF GOVERNMENT ASSISTANCE

2. Definition of Government Grants [3] • Assistance by the Gov. in the form of transfer of resources to an enterprise in return for past or future compliance with certain conditions relating to the operating activities of the entity • Assistance in term of; • Cash • Support • Subsidies • Compensation • Financial assistance for construction of assets

3. RECOGNITION • [7] Gov. grants, including non-monetary grants at fair value, shall not be recognised until there is reasonable that; • The enterprise will comply with the condition attaching to them; and • The grants will be received • [12] Gov. grants shall be recognised as INCOME over the periods necessary to match them with the related cost. They shall not be credited directly to shareholders’ interests.

4. 2 approaches in accounting treatment • Capital approach • Any receipt from gov. is credited to shareholders’ interest (directly to reserves) • Grants are seen as a equity financing transaction since no repayment is expected; and • Grants should not be taken to income because they are not earned income • Entry: • Dr. Cash (assets) • Cr. Government grant reserve (equity)

5. Income approach • All gov. grants should be dealt with in income statement over one or more period • Argument is based on statement that grants are receipts from source and are given to compensate for the expenses incurred ,other than the owners and are not equity transactions • Entry: • Dr. Cash (assets) • Cr. Deferred Income (liability) • FRS 120 only permit the income approach

6. Why grants is not equity transaction? • The enterprise must comply with their condition to earn them therefore cost exist in order to earned the grants • Grants like income taxes (gov. policy) which should be dealt with in IS • It is a receipts from a source, other than shareholders

7. Classification of grants • Will determine whether the grants will be recognise as income or as equity • Grants related to income; and • Grants related to assets.

8. GRANTS RELATED TO INCOME • Normally have related costs and expenses • Such grants are taken to income in the same period as the relevant expenses are incurred.

9. Presentation • Shall be presented as a credit in the IS, either • Separately under a general heading such as ‘Other Income’, or • Shall be deducted in reporting the related expense

10. GRANTS RELATED TO ASSETS • Two methods- Differed income or Writing off against asset • Grants that relates to a depreciable long-term assets • This grants should be allocated to income over the period to match with the related depreciable cost of the asset

11. Presentation • Shall be presented in the BS, either by; • Setting up the grant as deferred income; or Dr. Cash - Gov. grant xxx Cr. Deferred income xxx • By deducting the grant in arriving at the carrying amount of the assets (writing off against assets) • The grant is recognised as income over the life of a depreciable asset by way of a reduced depreciation charge • Refer example 1

12. Exercise 1 • BBF Research Sdn. Bhd. constructed a building for the purpose of conducting scientific research. The building was completed on 1/1/19x6 at cost of RM40m. It received grant of RM12m from Gov. Expected useful life is 40 years. The co. adopts the straight-line method depreciation with no residual value. • How the grant should be accounted for using method of presentation; • By crediting a deferred income, or • By netted off against building a/c

13. Revocation of the Gov. Grants • Due to failure to meet the specified conditions of the grant. • Repayable grants should be accounted for as a change in accounting estimated • Government may require an entity to make repayments in monetary asset; or surrender non-monetary assets

14. Revocation of Grants related to income • Should be applied first against any unamortised deferred credit • Any remaining balance, charges to IS

15. Exercise 2 • ABC Bhd. had received a RM300,000 grant in year 2003 to perform some social work over three years. The grand was credited to deferred income and amortised evenly over three years. • in 2005 there was certain condition was not fulfilled by ABC Bhd. and an amount of RM200,000 as repayable to gov. • How to account for this transaction?

16. Revocation of Grants related to assets • Shall be recorded by increasing the carrying amount of the asset or reducing the deferred income balance by the amount repayable • The cumulative additional depreciation expense that would have been charged to date in the absence of the grant shall be recognised immediately as an expense.

17. Exercise 3 • XYZ Bhd. purchased a machine costing RM500.000 on 1/1/2001. On this date, it received a govern. grant of RM200,000 for the machine purchased. The machine has a useful life of 5 years and depreciated using straight-line with no residual value. The company’s year-end is 31 December. • Explain how the grant should be accounted for under the two method of presentation. • Show the balances of relevant account as at 31 December 2002 • suppose, in the early 2003, the grant has become repayable in full. How this repayment should be accounted for.

18. Other disclosures • The accounting policy adopted for government grants, including the methods of presentation adopted in the FS • The nature and extent if gov. grants recognised in FS and an indication of other forms of government assistance from which the entity has directly benefited; and • Unfulfilled conditions and other contingencies attaching to gov. assistance that has been recognised.